TAMPA, Fla., (Reuters) – The FBI has opened an inquiry into the multibillion-dollar trading losses at JPMorgan Chase, stepping up pressure on the bank after key U.S. agencies said they were looking into high-risk trades that first drew regulators’ attention last month.
The news did little to spook investors, who sent the stock higher yesterday, or shareholders, who backed embattled Chief Executive Jamie Dimon at the bank’s annual shareholders meeting, with a vote rejecting a proposal to split the jobs of CEO and chairman.
Though investors mostly gave Dimon a pass, pressure mounted on the bank to reclaim some of the millions of dollars it paid to the executives who oversaw the trades. Dimon said JPMorgan would pursue more disciplinary action against those responsible.
“We will do the right thing. That may well include clawbacks,” he told reporters after the annual meeting.
The timing on any such move was not clear, though, and the various regulatory probes could add complications. A source familiar with the situation said Tuesday that U.S. and UK regulators first raised concerns with senior management in April.
A separate source familiar with the FBI probe, opened by the agency’s New York office, described it as preliminary. The probe was seen in some quarters as a necessary public step, given the ongoing debate in Washington about bank regulation, and one expert said it raised the level of concern around what happened.
“The FBI looks for evidence of crimes and goes after people who it alleges are criminals. They want to send people to jail. The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,” said Erik Gordon, a professor in the law and business schools at the University of Michigan.
The bank’s trading losses have also drawn the attention of the U.S. Securities and Exchange Commission and the Federal Reserve, both of which have opened inquiries.
After two trading days of heavy losses, JPMorgan shares rose 1.3 percent to close at $36.24. The stock is down more than 11 percent since the trading losses were disclosed, wiping out slightly more than $17 billion of market capitalization.
“It affects my opinion of the entire financial industry,” said Dennis Hong, principal with Altimeter Capital, a hedge fund that manages about $250 million. “It’s really shocking because JPMorgan has been known as the most conservative in terms of managing their business risk. They may be losing their way.”
AFFIRMS ‘CASE
FOR … REFORM’
In Washington, U.S. Treasury Secre-tary Timothy Geithner said JPMorgan’s losses strengthened the case for reform.
“I think this failure of risk management is just a very powerful case for … financial reform,” Geithner told an event sponsored by the Peterson Foundation. “The test of reform is not whether you can prevent banks from making mistakes … the test of reform should be: ‘Do those mistakes put at risk the broader economy, the financial system or the taxpayer?’“
Larry Summers, Treasury secretary in the last years of the Clinton administration, said JPMorgan’s loss strengthened the case for stronger capital requirements at banks.
“I think that whatever one thought about how large a safety buffer was necessary 10 days ago, it seems to me that in light of what has happened one would tend to have a bias towards larger safety buffers, larger capital requirements, larger levels of liquidity,” Summers said in an interview for the Freeland File show on Reuters.com.
Congress meanwhile ratcheted up its own response to JPMorgan’s trading blunder, which comes as policymakers are finalizing new rules for the bank industry.
“I would suggest that JPMorgan take their business to Las Vegas because it’s just a gamble,” Senate Majority Leader Harry Reid, a Democrat who represents Nevada, told reporters.
Congressional Republicans who have been critical of the 2010 Dodd-Frank financial oversight law took a cautious approach in addressing the still-unfolding scandal.
Senator Richard Shelby, the top Republican on Senate Banking Committee, wants a hearing held with Dimon and regulators to get answers, his spokesman said. Congressman Frank Lucas, chairman of the House Agriculture Committee, said he would delay a hearing on bills to rein in and clarify swaps regulation, citing the JPMorgan trading loss.
